Question

Morton Company’s budgeted variable manufacturing overhead is $4.00 per direct labor-hour and its budgeted fixed manufacturing overhead is $450,000 per year.

The company manufactures a single product whose standard direct labor-hours per unit is 2.0 hours. The standard direct labor wage rate is $30 per hour. The standards also allow 4 feet of raw material per unit at a standard cost of $6 per foot.

Although normal activity is 50,000 direct labor-hours each year, the company expects to operate at a 40,000-hour level of activity this year.

Required:

1. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.

2. Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.

3. Complete two standard cost cards as outlined below.

4. Assume that the company actually produces 24,000 units and works 49,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	198,200
Fixed manufacturing overhead cost		451,000
Total manufacturing overhead cost	$	649,200

a. Compute the standard direct labor-hours allowed for this year’s production.

b. Complete the Manufacturing Overhead T-account below. Assume that the company uses 40,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above.

c. Determine the cause of the underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.

Answer 1

Requirement-1 & 2: Req.-1 Req.-2 $450,000 - ->(a) Fixed manufacturing overhead Estimated direct labor-hours Predetermined fixed overhead rate Add: Variable overhead rate Predetermined total overhead rate $450,000 40,000 50,000 -->(b) $11.25 $9.00(a)/(b) $4.00 $15.25$13.00 $4.00 Requirement-3 Standard Cost per unit Case-2 $24.00 $60.00 $26.00 114.50 $110.00 Case-1 $24.00 $60.00 $30.50 Direct material Direct labor Mfg. overhead Total standard cost [4 feet x $6] [2 direct labor hours x $30] [2 direct labor hours x $15.25; 2 direct labor hours x $13.00]


Requirement-4: Number of units produced Standard direct labor hour per unit a) Standard direct labor hours allowed 24,000 2 48,000 [24,000 units x 2 DLHs] b) Mfg. overhead (T-Account) Variable $198,200 Applied Fixed $747,250 [49,000 hours x $15.25] $451,000 End. Bal 98,050 -> c) Over-applied MOH NOTE Applied mfg. overhead shall be based on actual DLHs and is calculated based MOH rate calculated using 40,000 DLHs as the base. DLH -> Direct labor hour; MOH ->Mfg. overhead. Ending balance is considered as over-applied MOH ($747,250) because applied MOH is higher than actual MOH recorded ($649,200) Actual direct labor hours used Standard variable OH rate per DLH Standard VOH for actual hours used $196,000 [49,000 x $4.00] Actual variable overhead incurred $198,200_[Given] 49,000 $4.00 $2,200 ($198,200 - $196,000) Variable overhead rate variance Unfavorable (as actual is higher than standard VOH)

Actual direct labor hours used Standard labor hours allowed Short of direct labor hours used Standard variable OH rate per DLH Variable overhead efficiency variance 49,000 48,000 [As calculated in (a)] 1,000 [49,000 48,000] $4.00 $4,000 Unavorable (as actual hours is more than standard hours allowed) (1,000 x $4.00) Fixed overhead flexible budge Actual fixed overhead Fixed overhead budget varianc $551,250 [49,000 DLHs x $11.25] $451,000_IGiven] $100,250 Favorable (as actual is more than flexible budget FMOH) Fixed overhead budgeted Fixed overhead flexible budget Fixed overhead volume varianc $450,000 $551,250 [49,000 DLHs x $11.25] $101,250 Unfavorable (as flexible budget is more than budgeted FMOH) ($551,250- $450,000)